A machine has a cost of $5,575,000.It will produce cash inflows of $1,825,000 (year 1); $1,775,000 (year 2); $1,630,000 (year 3); $1,585,000 (year 4)and $1,650,000 (year 5).At a discount rate of 16.25%, the project should be
A)accepted.
B)rejected.
C)discounted at a lower rate.
D)abandoned after the first year.

Question

Quizplus · Accepted Answer

To determine whether the project should be accepted or rejected, we need to calculate the net present value (NPV) of the cash inflows.

NPV = (Cash inflow year 1 / (1 + discount rate)^1) + (Cash inflow year 2 / (1 + discount rate)^2) + (Cash inflow year 3 / (1 + discount rate)^3) + (Cash inflow year 4 / (1 + discount rate)^4) + (Cash inflow year 5 / (1 + discount rate)^5) - Cost of machine

NPV = ($1,825,000 / (1 + 0.1625)^1) + ($1,775,000 / (1 + 0.1625)^2) + ($1,630,000 / (1 + 0.1625)^3) + ($1,585,000 / (1 + 0.1625)^4) + ($1,650,000 / (1 + 0.1625)^5) - $5,575,000
NPV = $35,013.90

Since the NPV is positive, the project should be accepted. However, if the NPV had been negative, the project should have been rejected (choice letter B).

A Machine Has a Cost of $5,575,000